NUS-Tsukuba Joint-Online-Workshop on ”Sustainable ...
Transcript of NUS-Tsukuba Joint-Online-Workshop on ”Sustainable ...
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NUS-Tsukuba Joint-Online-Workshop on”Sustainable Management and Data Sciences”
Choices & DecisionsBehavioral Insights in Consumer Research
15 March 2021
Leonard Lee
NUS Business School & Lloyd’s Register Foundation
Institute for the Public Understanding of [email protected]
Puzzle 1: Organ DonationAustriaGermany
12% donors 99% donors !!
Do not Donate Organs1%
Donate Organs12 %
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72%0%
28%
43%
57%
Source: Kivetz, R., Netzer, O., & Srinivasan V. (2004). Alternative Models for Capturing the Compromise Effect. Journal of Marketing Research, 31(3), 237-57.
Puzzle 2: Magazine Subscription
Puzzle 3: Which line is longer?
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Behavioral EconomicsIllusions as a Metaphor
What is a Behavioral Insight?
• insight noun \ˈin-ˌsīt\1: the power or act of seeing into a situation2: the act or result of apprehending the inner nature of
things or of seeing intuitively
Source: Merriam-Webster Dictionary
fact/truthbelief/value/
attitude/need
behavioroccurrence
phenomenon
observationunderstanding interpretation
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What is a Behavioral Insight?
• A statement, observation, or finding about people’s behavior that a. is grounded on solid empirical facts;b. is generally true;c. is not intuitively obvious; andd. has direct implications for major constituents.
1. People are cognitive misers.2. People’s preferences are often
“constructed” and context-dependent.3. People often think in systematic but
different ways than those predicted by rational choice theories.
Three Principles in Behavioral Economics
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Why Do People Like Choices?
• Better preference matching• Expected changes in taste• Choice confidence• Perceived control and freedom
to choose (“positive liberty”)• And many more…
When Choice is Demotivating…• Grocery shopping in CA• 6 vs. 24 flavors of jams• 754 shoppers observed• Shoppers received a $1-
off coupon for jam purchase
Assortment Condition % tasted jams % purchased jams
Limited (6 jams)Extensive (24 jams)
Source: Iyengar, S., & Lepper, M.(2000). When Choice is Demotivating: Can One Desire Too Much of a Good Thing. Journal of Personality and Social Psychology, 79, 995-1006.
30%3%
40%60%
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How Do People Decide
• A continuum of views:
Rational Approaches
Standard Economic
Theory
MotivationalApproaches
Freudian/Evolutionary/ Anthropological
Approaches
Bounded Rationality
Behavioral Economics &Behavioral Decision Theory
Standard Economic Theory
• People assess options relative to their net worth
• Pick the best option to maximize utility subject to budget constraint
Wealth
Utility
q1
q2
q*1
q*2
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Behavioral Approach to Decision Making
• People weigh the perceived costs and perceived benefits of alternative options/decisions or decision processes.
• Bounded Rationality (Herbert Simon)§ People, because of limited processing
capacity, use simplified ways to make decisions.
§ Optimizing vs. Satisficing• People use heuristics and simple decision
rules that can lead to systematic biases.
To what extent are people’s preferences inherent and stable?
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Classical Economists’ View of Preferences
• Expected utility theory (von Neumann & Morgenstein)
à People have stable preferences• Pick the best option to maximize utility subject
to budget constraint – “exquisite intelligence”● Utility is revealed in choices
§ Weak axiom of revealed preferences: “If x is ever chosen when y is available, then there can be no budget set containing both alternatives for which y is chosen and x is not.” (Paul Samuelson)
Behavioral Economists’ View of Preferences
• Preferences can be constructed!§ People do not always have stable valuations for the
same products or options§ x and y can be chosen in different contexts
• Malleability of people’s preferences is an opportunity for managers and policy makers!Ø choice architecture and nudges
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At the Movies…
Compromise EffectThe share of a product is enhanced when it is the
intermediate option in the choice set and is diminished when it is an extreme option. (Simonson 1989)
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Compromise Effect
Battery Life
A
B
C
D
Screen Size
Asymmetric Dominance Effect
Attribute 1A
B
C
Attribute 2
competitor
target
decoy
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Asymmetric Dominance Effect
Adding a dominated alternative can increase the probability of choosing the dominating alternative (Huber, Payne and Puto 1982)
Principle #2People’s preferences
are often “constructed” and context-dependent.
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Nobel Laureates…
BUSINESS/FINANCIAL DESK | October 10, 2002, Thursday A Nobel That Bridges Economics and Psychology
By DANIEL ALTMAN (New York Times)
ABSTRACT - Daniel Kahneman of Princeton University and Vernon L Smith of George Mason University are awarded Nobel Memorial Prize in Economic Science; tried to explain idiosyncrasies in people's ways of making decisions, research that has helped incorporate insights from psychology into discipline of economics; photos (M)
Prospect Theory
GainsLosses
Value• Kahneman & Tversky(1979)
• Value is judged relative to a reference point
• Diminishing sensitivity• Losses loom larger than
gains (estimates range 2.0 – 2.5) à loss aversion
g
l
l > g
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Principle #3People often think in different but
systematic ways than those predicted by rational choice theories.
Concepts from Prospect Theory
• Loss aversion• Framing• Status quo bias
GainsLosses
g
l
l > g
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Loss Aversion and Life During the COVID-19 Pandemic
BehavioralChange
Losses Gains
Online shopping Unable to touch/examine/choose physical items
24x7 convenience
Telecommuting (working from
home)
Work-family conflict / interactions less
personal
20-sec commute/ meetings in shirt and shorts/sweatpants (!)
Use of TraceTogether
app
Perceived loss of privacy /
hassle to install app
Facilitate contact tracing / flatten curve in
Singapore
• If you want to discourage energy usage/waste, which language would you use in your messaging? Ø Option 1: “If you use energy conservation
methods, you will save $350/year”
Ø Option 2: “If you do not use energy conservation methods, you will lose $350/year.”
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Framing• Imagine that the US is
preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed:
Gain Frame:● Program A: 200 people will be
saved.● Program B: There is a 1/3
probability that 600 people will be saved, and a 2/3 probability that no one will be saved.
Loss Frame:● Program C: 400 people will
die.● Program D: There is a 1/3
probability that nobody will die, and a 2/3 probability that 600 people will die.
Respondents’ AnswersGain Frame – A: 72% B: 28%Loss Frame – C: 22% D: 78%Source: Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453-458.
Defaults and Status Quo Bias
Source: Johnson, E. J. & Goldstein, D. G. (2003). Do defaults save lives? Science, 302, 1338-1339.
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Other factors that influence decisions?
A Typology of Basic Needs
Physiological
Hunger
Thirst
Sleep
Energy
Thermal equilibrium
Freedom from pain & disease
Sensory & Sexual pleasure
Safety & Structure
Security
Protection
Shelter
Order / Structure
Stability & Predictability
Belonging & Connection
Affiliation & Connection
Giving affection
Nurturing
Receiving affection
Trusting
Being trusted
Self-Identity & Self-Esteem
Uniqueness & Identity
Autonomy & Independence
Achievement
Mastery & Competence
Respect & Recognition
Status & Fame
Dominance
Understanding & Exploration
Knowing
Understanding
Consistency & Balance
Intellectual stimulation
Exploring
Playing
Transcendence & Personal
Growth
Aesthetic pleasure
Collecting experiences
Personal Growth
Spirituality
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Feeling vs. ThinkingThe Two-System Model
Emotional processing Cognitive processing
Automatic ControlledEffortless Effortful
Rapid, parallel Slow, serialHolistic AnalyticPassive Active
Associative connections Logical connections
System I System II
Epstein, S., & Pacini, R. (1999). Some Basic Issues Regarding Dual-Process Theories from the Perspective of Cognitive-Experiential Self-Theory.” In S. Chaiken & Y. Trope (eds), Dual-Process Theories in Social Psychology, 462-482.
Source: Kahneman, D., & Frederick, S. (2002). Representativeness Revisited: Attribute Substitution in Intuitive Judgment. In T. Gilovich, D. Griffin, & D. Kahneman (eds), Heuristics and Biases: The Psychology of Intuitive Judgment, 49-81.
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Availability Bias
• People judge the the prevalence of an event through immediate examples that come to their mind, rather than scientific evidence or statistics.
• Implication: Memories that are well-remembered may elicit intense feelings and have strong influence on attitudes and behavior.
Diabetes medication causes kidney failure for
my mom.
My uncle smokes a pack of cigarette a day. He lives until 90.
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Source: Goldstein, N. J., Cialdini, R. B., & Griskevicius, V. (2008). A Room with a Viewpoint: Using Social Norms to Motivate Environmental Conservation in Hotels. Journal of Consumer Research, 35, 472-482.
39%
38%
48%
Six Principles of Persuasion (Cialdini)● Reciprocity
§ People repay in kind
● Scarcity§ People want more of what they can have less of
● Authority§ People defer to experts
● Consistency§ People align with their clear commitments
● Liking§ People like those who like them
● Social Proof (Consensus)§ People follow the lead of similar others
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1. People are cognitive misers.§ People like to have choices and seek variety, but too many
options can demotivate choice.§ They often “satisfice” rather than optimize.
2. People’s preferences are often “constructed” and context-dependent (i.e., importance of choice architecture)§ compromise effect, asymmetric dominance effect
3. People often think in different but systematic ways than those predicted by rational choice theories.§ Prospect theory, loss aversion, framing, status-quo bias§ When making decisions, people are also influenced by their
needs, feelings and impulses, memory, and social environment.
Three Principles in Behavioral Economics
Be Safe and Stay Healthy!